succession planning - how to future proof your business

Succession planning How to future proof your business

http://www.jpabusiness.com.au/

Table of Contents

Chapter 1: What is succession planning? ................................................................ 3 When to start succession planning? .......................................................................................................... 3 Why is business succession so often neglected? .................................................................................. 4 Aim for a picnic, not a panic .......................................................................................................................... 5

Chapter 2: Business succession war stories – the good, the bad and the average ... 6 Succession stories from the corporate world ........................................................................................ 6 JPAbusiness client succession stories ....................................................................................................... 9

Chapter 3: Six strategies for making succession part of your business model ......... 11 1. Develop a learning culture in your business .................................................................................... 11 2. Encourage open communication .......................................................................................................... 13 3. Share your vision ......................................................................................................................................... 13 4. Share responsibility .................................................................................................................................... 13 5. Identify key roles in the business and assess gaps ......................................................................... 14 6. Identify potential leaders and provide professional development opportunities ........... 14

Succession planning for mature businesses ......................................................................................... 15

Chapter 4: How to use our Business Succession Scorecard .................................... 16

Disclaimer: The information contained in this eBook is general in nature and should not be taken as personal, professional advice. Readers should make their own inquiries and

obtain independent advice before making any decisions or taking any action.


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Chapter 1: What is succession planning? Comments by James Price JPAbusiness Pty Ltd

Many people think of succession planning as an old person’s problem – something you do once you decide to exit your business. This is far from the truth.

Succession planning is actually a young person’s pathway to building a valuable business. It’s

about creating a sustainable business that will continue to operate successfully into the future, whether you stay in the business or not.

We’re big supporters of succession planning and having a succession plan, and we provide advice on this area of business to our clients.

However if you are a business owner or director of a company that has been operating for some time, and you’re only now saying “we need to create a succession plan”, you’ve already missed a great opportunity to build incremental value.

When to start succession planning?

It’s never too early to start thinking about your succession strategy and developing the skills of your team and business capability.

To explain how this succession thinking should fit into your business I’ll use the example of today’s professional sporting teams:

Many years ago if you were a reserve in a team you got to carry the oranges at half-time and that was it – you just made up the numbers.

Today’s reserve bench – or interchange bench – is a critical part of a sporting team’s success.




The reserves are part of the team, receive exactly the same training as the team’s most valuable players, often offer different, specialised skills and can interchange in and out depending on issues in the team, such as illness, injury, or a change in strategy.

These highly professional sporting teams actually mirror the workings of a successful business with an effective succession strategy.

Why is business succession so often neglected?

There are many reasons business succession is neglected but four key ones are:

• busyness• lack of foresight• emotion• generational differences.

Busyness – Sometimes we’re focused so heavily in the business – in the day-to-day operations – that we don’t think about the future. We’re so bogged down we don’t step back and think strategically about opportunities to build, change and grow the business, nor do we think about ‘life after the business’.




Lack of foresight – Often business leaders think: “I’m not going anywhere soon, so what’s the point?” But around half the time the leadership reins are handed over in small businesses it’s due to unforeseen circumstances.

Emotion – Most humans don’t like to think about dying or developing a serious illness and business leaders are no exception. As a result they don’t address issues like: “If I was run over by a bus today, what would happen to my business? What would happen to my staff? If I developed a mental illness, who would service my customers? How would my family earn a viable income?”

Generational differences – Many of today’s business owners are Baby Boomers (people born between 1946 and 1964) and this generation tends to equate succession with retirement. For this reason many Boomers have not given much thought to business succession planning until recent times. Unfortunately, as we’ve already mentioned, starting your succession planning just before you sell or hand over to family members is not a successful strategy for maximising business value or transitioning smoothly.

Aim for a picnic, not a panic

Read any business blogs or articles about succession and one phrase you will see repeatedly is ‘succession panic’.

By starting early and employing foresight and planning, we believe you can enjoy a ‘succession picnic’ instead.




Chapter 2: Business succession war stories – the good, the bad and the average Comments by James Price JPAbusiness Pty Ltd

Succession stories from the corporate world

The following business succession examples come from the international corporate world and have been well reported in business advice and human resources articles and blogs.

They provide some valuable lessons in how to – and how not to – plan for succession.

HP – The bad

Over the course of 15 years HP (Hewlett Packard) had seven different CEOs – each horridly replaced with the next.

At its core, the problem was the incoming CEOs were not adequately educated on the innermost workings that made HP successful. They came in with sweeping changes that contradicted the soul of HP.




For example Mark Hurd, who took on the role in 2005, focused on cost cutting, which resulted in suffocating employee autonomy and innovation – the very things that initially made HP successful.

By the time current CEO Meg Whitman took over in 2011, the tech giant was struggling.

As Whitman told Fortune magazine in a 2014 interview: “Succession planning is absolutely essential. Bill Hewlett and David Packard founded the company when they were 25 years old in 1939 and they ran the company for 50 years… When they left the succession planning was not what you would hope it to be.”

Apple – The middle of the road

Steve Jobs put a lot of time and energy into grooming Tim Cook to take over his role as CEO of Apple. This included creating a large library of instructional multi-media materials, which included videos and manuals.

However, Jobs’ decision to continue as CEO until just weeks before his death meant Cook didn’t have the opportunity to grow into the role with Jobs standing by as a mentor. As a result, investors got nervous leading to a dip in Apple’s share price.

In hindsight, Jobs probably should have stepped down earlier.

McCormick & Co – The Good

Spice company McCormick & Co (MKC) enjoyed a very successful transition from CEO Robert Lawless to Alan Wilson. The transition followed five years of grooming and a well thought out mentoring relationship between the previous and new CEO.

Upon retirement Lawless took over as non-executive chairman of the board. He was aware there was a risk that if he didn’t step back McCormick would essentially have two CEOs so, to avoid this, he moved away so he couldn’t be in the office every day.




At the same time, he scheduled weekly phone calls and monthly catch-ups with Wilson in order to be an effective mentor to his successor.

MKC’s succession strategy was larger than just the CEO transfer, however.

As Lawless told Bloomberg Business in 2008: “We in management … determined early on that … we would have succession plans for all senior executives.

“The company was performing well. We had good, solid strategies. The younger team participated with the seasoned team in developing the strategies. So it's not as though we brought them in late in the game.

“We identified five or six or seven individuals who were going to play senior roles. They were part of the process and thus were invigorated.”




JPAbusiness client succession stories

Over the years JPAbusiness has been called in to assist with numerous business succession situations. The following examples come to mind:

Business 1 – This was a large family farming business (beef cattle) involving a father whose wife had passed away many years earlier and two children, a daughter and a son. The children both had their own families. The daughter lived on the farming property while the son lived elsewhere and had his own business interests.

The intentions of the father with regard to succession issues were rarely discussed with his children.

The father became mentally ill and passed away. The consequences of his Will became evident following his death, which led to the son and daughter fighting the Will through the courts over an extended period.

All parties suffered emotionally, endured stress and were forced to pay lawyers a lot of money, while the business itself also suffered and needed to take on more debt as a result.

Once the Will, the restructuring and the buying each other out was complete, the son and daughter could finally focus on rebuilding the business and getting on with their lives.

Poor succession planning caused at least five years of uncertainty, with the result being business stagnation and decline.

Business 2 – This was a relatively young business in the building and construction sector (established eight years) with excellent growth and earnings.

The founding director was leading the business and it achieved repeated 25%+ earnings before tax on turnover. The business had a small and focused team and a strong business order book.




The founding director wanted to sell the business to spend time with his family and change direction to another industry sector.

The business was on the market for three years. Many potential buyers queried the sustainability of the business’ performance, given its young age, lack of formal business processes and systems, and team structure.

When it finally sold, part of the transaction terms included a three-year, full-time employment requirement for the founding director to remain in the business. This was due to the perceived risk associated with his heavy involvement in so many aspects of the business’ operations.

Business 3 – Three brothers own a large retail business with 15 outlets, a turnover in excess of $100 million and significant associated real estate assets. All are aged between 70 and 80 and all continue to run the main management and financial functions of the business.

The brothers are desperately concerned about how to transition their business and legacy and the potential impact of possible health deterioration, however they are procrastinating on a way forward.

They don’t have a succession plan and there are few employees in the business and/or family members who could adequately take over the reins held by any of the brothers. Time is ticking.




Chapter 3: Six strategies for making succession part of your business model Comments by James Price JPAbusiness Pty Ltd

If you are just starting out in business or your business is relatively young, you are perfectly positioned to make succession just another part of your regular operations.

Here are 6 succession strategies you can employ:

1. Develop a learning culturethroughout the business

2. Encourage open communication at all levels3. Share your vision4. Share the responsibility for decision making, day-to-day operational

activities and strategic direction5. Identify key roles in the business and assess the risk of gaps6. Identify potential leaders and provide professional development

opportunities that are linked to a career path in the business.

Adopting these strategies will help future proof your business for when and if you decide to take up an exit opportunity.

1. Develop a learning culture in your business

Having a learning culture means you use every win and loss in your business as an opportunity for your team to learn and grow.

This is an attitude that must come from you, as the leader, and be shared throughout the entire staff.




Here’s an example:

You have delivered a large order to a customer and found that only 80% of the order was delivered on time and in spec. The 20% that wasn’t delivered on time or in spec cost the business significantly in terms of reductions in the payment of the final invoice.

When you examine why this occurred you find that there were process and quality issues, as well as customer communication issues that contributed to the problem.

In this case you were the sales person and your examination has shown what you did wrong.

Having a learning culture means you will now sit down with the other sales people in your team, plus other relevant team members, and discuss what you learned. Together you can come up with some different systems and processes to avoid it happening again.

Using every opportunity for the team to learn helps you build a sustainable business.




2. Encourage open communication

Being able to share your wins and losses is obviously reliant on having an atmosphere of open communication where there is no danger of “shooting the messenger”.

This is easier to say than it is to implement, but staff need to know they can discuss good and bad aspects of the business, risks and opportunities, in the spirit of ensuring the business continues to do what it does well. That level of sharing automatically protects you from people and business risks.

3. Share your vision

Having a culture of open communication will also allow you as a leader of the business to ensure the business direction, strategy, vision and broad business objectives are clearly and regularly communicated to the team.

This ensures your team is engaged with the culture and that it will filter down organically through the ‘layers’ of the team. It also means any potential leaders in the team are well aware of your succession and/or exit plan (if you have one) and what it will mean for them.

4. Share responsibility

Imagine that a key staff member leaves your business who, for the past 10 years, has been solely responsible for managing customer relationships with your top 10 customers. Most of what they know about these customers is sitting between their ears and has not been shared anywhere.

In this situation you have a real problem in terms of business succession and, hence, business value. If you were the owner and you were trying to exit the business with that situation in the background, most purchasers would identify it as a huge risk and would factor it into their view about the worth of the business – and not in a positive way!

Even if you were not planning to leave the business, the loss of that staff member and their accumulated knowledge would represent a massive blow to your ongoing operations.




5. Identify key roles in the business and assess gaps

As a business leader ask yourself:

• What capabilities does this business need to run effectively?• How lean or covered are those capabilities?

6. Identify potential leaders and provide professionaldevelopment opportunities

Sophisticated corporate businesses usually have board meetings on a once-a-month or once-a-quarter basis.

Part of their governance process involves looking at the senior positions within the business and then looking for bright stars in the lower ranks who have the aptitude and potential to move up.

These business people actively plan how they will nurture those ‘bright stars’ within their business through to a point in time where they could take over from the CEO, general manager, head of sales and marketing, and so on.

They do this by ensuring each individual has the right professional development program and is involved and engaged in the process of creating their own career pathway.

It should be no different when small or mid-sized business owners plan their own succession strategy.

http://www.jpabusiness.com.au/e-book/training-and-professional-development-advice-for-small-to-mid-sized-businesses

http://www.jpabusiness.com.au/e-book/training-and-professional-development-advice-for-small-to-mid-sized-businesses




Succession planning for mature businesses

The succession strategy outlined above is for the best-case scenario: a new or young business that can make succession part of its long-term planning.

Unfortunately that can’t be the case for existing businesses, but it’s better to start late on succession planning than not start at all.

The first thing the leader of a mature business should do is sit down with senior staff and/or family members and talk about their succession goals.

Of course, sometimes the business leader may not know what their objectives are. This may be because they’ve worked in the business and grown it from scratch for 30-plus years, and it has been all-consuming. Pondering the future just hasn’t been a priority.

In that situation it’s wise for the business leader to sit down with an advisor first, to tease out what might be reasonable lifestyle, succession and business objectives, before meeting with senior staff and/or family.

Just what those objectives turn out to be will, of course, be influenced by things like health, lifestyle expectations, financial and other commitments related or unrelated to the business, and tax considerations.

Once your objectives are established, share them openly, to the extent they are relevant, with senior people in your business that you count on for the business’ sustainable performance, family members with an interest in the business, joint shareholders, and so on.

That discussion and ongoing open communication will lead to a plan about how succession will happen in your business.

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http://www.jpabusiness.com.au/blog/posts/james-price/2015/10/25/succession-and-retirement---business-structure-issues-and-options




Chapter 4: How to use our Business Succession Scorecard Comments by James Price JPAbusiness Pty Ltd

In this chapter you will find our Business Succession Scorecard which asks you to rate your preparedness for succession based on several key parameters:

• Leadership• Decision making• Operations• Culture• Communication• Forced exit• Business transition.

The final items in the scorecard – Forced Exit and Business Transition – are really the acid tests for determining the sustainability and value of any business i.e. will it survive without me, and let’s see what the market thinks!

If you have future proofed your business by having a well thought out and implemented succession strategy, the business should thrive even if you’re not there, and the market should reward you.

You can use the checklist on the following pages or download a copy from our website.



http://www.jpabusiness.com.au/e-book/jpabusiness-business-succession-scorecard

http://www.jpabusiness.com.au/e-book/jpabusiness-business-succession-scorecard


©"2016"JPAbusiness"Pty"Ltd" This"work"is"licensed"under"the"Creative"Commons"Attribution"4.0"International"License.""ABN"62"150"534"099" To"view"a"copy"of"this"licence,"visit"http://creativecommons.org/licenses/by/4.0/."

JPAbusiness"Business"Succession"Scorecard" s a business owner, company director or board member, you can use this scorecard to assess your business’ succession preparedness by answering the following questions on key criteria

which demonstrate business succession planning.

Choose the answer that most closely matches your business, tick the related check box and tally up your score. Make sure you answer the questions honestly – your business value and future depends on it.

A

Business'succession'themes'

Rate"your"preparedness"Your"score"

Leadership'

What is the strength and diversity of leadership, planning, direction, strategy, vision, drive and motivation in your business?

These functions are shared by two or more people, including you, and there are also documented business plans, budgets and targets that are shared, managed to and monitored regularly (at least monthly) within the business. ! (1 point)

! These functions are shared by two or more people, including you, although not documented or monitored. ! (2 points)

You are solely responsible for at least 75% of these key business functions. ! (3 points)

Decision'making

Which of the following best describes how day-to-day and important decisions (relating to cash flow, treasury, sales, team performance, quotes, estimates, tenders, recruitment and people management) are made?

There are well-established delegation and management processes in place that provide individual team members with responsibility for their functional area. ! (1 point)

! Decision making is reliant on a couple of key senior people with few established business systems and processes. ! (2 points)

Over 75% of decisions are made by you alone. ! (3 points)





Business'succession'themes

Rate"your"preparedness Your"score

Operations

Which of the following best describes who is responsible for operational functions and tasks undertaken in your business?

These functions are shared by two or more people, including you, and there are effective business systems, processes and monitoring to ensure individual team members achieve the desired outcomes. ! (1 point)

!Operational performance is reliant on a couple of key senior people with few established business systems and processes. ! (2 points)

Over 75% of operational activities are conducted by you alone. ! (3 points)

Culture

How well does all the team (from the lowest paid to the highest paid) consistently understand and engage with the vision, direction, purpose and business' plan and requirements?

There is a documented business plan, budget and forecasts that are actively updated by a large number of team members. There are also well established and clearly communicated and tracked targets associated with these plans. ! (1 point)

!Plans and business direction are largely set by a small number of senior managers (including yourself and at least two others) and communicated periodically in a structured way. ! (2 points)

You set the plans and direction of the business. The business team, including other shareholders or family members, and the various business functions operate independently of these plans, focusing on conducting day-to-day activities. ! (3 points)

Communication

How do you communicate your business culture to your team?

There is open communication and an achievement- driven culture where employees regularly and actively identify risks and issues important to the team and business achieving its goals. ! (1 point)

!Plans and business direction are known by a couple of key people and are communicated periodically in a structured way. ! (2 points)

You rarely communicate your business plans with your team. ! (3 points)





Business'succession'themes"

Rate"your"preparedness" Your"score

Forced'exit'

If you died or were incapacitated tomorrow, what would be the likely impact on your business?

There would be little impact on the business earnings in the ensuing 12 months (no more than 10% reduction) and minimal senior management team changes. ! (1 point)

!The business would suffer a decline in earnings in the ensuing 12 months of 20% or greater and there would need to be an ownership restructure and/or recruitment of additional senior management team members to replace you. ! (2 points)

The business would probably cease operating as you alone are responsible for at least 75% of the key business functions. ! (3 points)

Business'transition'

Imagine a circumstance in which you are looking to acquire a business and you identify one just like the business you currently own. Knowing your own level of involvement in your business, and the risks and issues associated with that and the business, what transaction acquisition terms would you seek to negotiate during the purchase to manage transition risks?

A three-month transitionary arrangement from sale completion, where the current owner is required to be available to advise on aspects of the business including key customers, relationships, broader market issues, and the transfer of all senior staff (subject to interviews and satisfaction of all parties prior to completion). ! (1 point)

!

A 12 to 36-month full-time employment arrangement from sale completion, where the current owner is required to work in the business and also transition knowledge and relationships. A 25% discount to the purchase price (relative to current market multiples and values) and/or a percentage of the sale purchase price paid 'at risk' (i.e. contingent upon the business achieving certain criteria post a completion) to account for risks associated with the business being heavily reliant on one person. ! (2 points)

You would walk away from the opportunity to purchase the business as it is too risky to buy based on risks associated with the business being heavily reliant on one person. ! (3 points)

Your'total'score:" !





What your score means

If you scored 7 your business succession plans are well progressed and developed – keep focusing and fine-tuning them.

If you scored between 8 and 11 your business succession plans are evident, however they need some serious focus and attention. Seek advice to identify the areas of deficiency and focus closely on addressing these.

If you scored 12+ your business succession plans are likely to need some work. You are potentially diminishing the value and value potential of your business by not acting. Seek advice on how best to address this issue.

If you would like to learn more about the business advice, valuation and transaction services offered by the team at JPAbusiness, visit

www.jpabusiness.com.au or call 02 6360 0360.

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